Hoping not to mis-characterize Wesbury, Bernancke and others, let's make sure I have this right.

1. The market was not up because of quantitative expansion.2. All money created so far stays in the market to the tune of trillions of dollars.3. We will keep expanding the money supply for many more months, 100s of billions more.4. Yet the mere hint that the excessive creation of new dollars will ever end puts the market in a tailspin.

Did we really not know this artificial injection of dollars would end someday, one way or another?

Murphy's Law must apply when Fed Chiefs talk to the market. Alan Greenspan tried to talk the market down with his famous "irrational exuberance" speech in 1996 and the market continued up for 5 more years. Ben Bernancke says that in a half year we may slow this most responsible 'temporary stimulus' and the market implodes.

BTW, shouldn't we be rather pleased that the Fed is finally making noise about diminishing its war on savers?

You are right, but the war against savers was successful. There aren't any savers anymore. A dollar saved isn't necessary for a dollar to be available for lending in this economy and we have government to turn to on a rainy day or unexpected hardship. Just like work isn't tied to pay anymore, or fatherhood to responsibility, welfare to stigma, and so on. If you want a better reward, hire a better lobbyist.

The interest rate was the balance point between borrowers and lenders, a market based, economic equilibrium. Now interest rates are contrived, artificial and low. A generation has no idea what the power of compound interest means. Try compounding 0.01% over 10 years while it loses 3-4% per year in value and show a young person how they benefited by not spending. Even the (Keynesian mostly) economists tell us saving is bad for the economy - it takes from consumption. [I don't agree!]

Next we will want to bring back old ideas like reward for hard work, abstinence, delayed gratification, personal responsibility? Balanced budgets? Property rights?! Keeping the fruits of our labor? Crazy talk!

Meredith Whitney is out with a new book on the emerging markets in the USA....Yash

Experiencing "Emerging Market" GrowthBY FS STAFF06/20/2013

• Meredith Whitney joins the Financial Sense Newshour to discuss how central corridor states like Texas, Colorado, and North Dakota will start to become the new engines of growth for the US economy. On the other hand, she warns, states with high taxes and large overhangs of debt, like California, may see stagnant growth for years to come.

How this will play out and what it means for everyday Americans, depending on which state they live in, is the focus of her new book, “Fate of the States: The New Geography of American Prosperity.”

Although some might claim that states like Kansas and South Dakota will never have the appeal of New York or sunny California, Whitney basis her long-term projections for a massive demographic shift within the country on what she says is emerging-market like growth in the central corridor due to low taxes, business friendly regulation, and cheap energy.

“You have a really powerful wave of onshoring going on in the United States,” Meredith says. “The energy revolution of cheap oil and gas because of shale technology…is making the US so competitive from a standpoint of manufacturing that more American businesses—40% plus percent of American businesses—are now building in the US that previously would’ve been offshored; and non-US businesses are moving more of their production to the US. So, [they’re] building new facilities and that’s creating incredible job opportunities and unemployment rates that are, literally, half the unemployment rates on the coast. So, there’s a pro-cyclicality to that and you have great, what I call, emerging markets' growth in some parts of the country and real stagnation in other parts of the country. So, it’s really a tale of two economies.”

Further sealing the deal is what she describes in her book as a “negative feedback loop from hell,” where states that are suffering with large debt overhangs and dwindling tax revenues don’t have the money to pay or invest in things like infrastructure, education, and public safety. As those services begin to deteriorate overtime, states will be forced to raise taxes, which only reinforces the decline.

“If you’re buried in debt, all you’re doing is paying off that debt and you’re not investing.” For example, “If you think about California, it’s not just the debt that they took on from their municipal debt, it’s the debt they took on from underfunding their pensions; and both of those types of debt, the municipal debt and the pension debt, have the constitutional backing of taxpayers. So, in an environment when California should be doing everything it can to keep businesses, to attract jobs, what does it do? It raises taxes and drives more businesses and more jobs out of the state. So, they are in an impossible situation.”

Market behavior – especially since Fed Chair Ben Bernanke mentioned QE tapering – has been relatively dramatic. Not unprecedented, but dramatic. By contrast, the reaction of the punditry has been way over the top.

If the Fed were a baby, last week’s move was the equivalent of crawling. It “announced” it was maybe, sorta, kinda, thinking about ending QE sometime in the next year. This isn’t even a baby step, but some who used to complain about easy money now complain the Fed is sprinting toward tightening and are mad that the Fed is apparently disrupting bull markets in stocks and bonds. But fearing an end to QE is giving QE too much credit in the first place. While the conventional wisdom says QE artificially held down interest rates, boosted stock prices, and/or risked hyper-inflation, we don’t believe any of this.

First, we don’t think QE actually works.(Yes!) Yes, the monetary base has jumped dramatically, but the M2 measure of money is still growing along its long-term 6% trend. (as noted by Scott Grannis)

Second, QE itself has not lifted asset prices. Price-earnings ratios are lower today than they were in 2008 when QE started (I did not know that. This seems to me a very pertinent datum) and long-term bond yields are low because the Fed has promised to hold short-term rates down near zero. If the Fed says it will hold the funds rate near zero for three years, then the 3-year Treasury yield will be near zero, too.

Third, gold was massively overvalued,( apoint of which I have warned. Gold is down now some 35+% or so from its peak) driven up by overwrought predictions of hyperinflation. (Anyone here want to stand behind the prediction made here in this regard?) Some investors were obsessed with the monetary base and ignored that the vast bulk of QE ballooned excess reserves held by banks, which does not boost the money supply. (This seems a fair criticism to me)

Fourth, moderate “Plow Horse” economic growth is not due to QE, but a combination of new technologies – fracking, 3D-printing, the cloud, smartphone, and tablet – being offset by the burden of big government spending and regulation, which work against growth. It’s not all a “sugar high.” (Again, Keynesianism does not work; but for Baraq and Bernanke we would be doing much better-- we survive thanks to the private sector)

Finally, the Fed has changed nothing so far. Nada, zero, zilch. It’s still buying $85 billion in bonds every month – the same as the last several months. Everyone knew the Fed would say it, then slow it, then stop it,…and only then raise interest rates and unwind it. And each will only happen when the Fed thinks the economy can handle it. In other words, all these fireworks are a little overwrought.

The acceleration in market moves in recent days, other than for stocks, is not all that surprising. Gold and bonds have been overvalued and stocks have been cheap. Compared to a year ago, asset values have moved exactly like the fundamentals say they should have.

But those who have based their entire economic narrative on Fed action and QE are now adrift. Hyper-inflation has not appeared and the economy is doing OK. In other words, the whole “sugar high” theory is not working. (Seems a lucid argument to me)

Bond yields are probably on their way higher. During past easing cycles, the spread between the 10-year Treasury and the Fed funds rate has been above 3.5%; currently it’s 2.4%.

Some worry that these higher bond yields mean lower stock prices and weaker housing activity and a slowdown in the economy. But, we use a 4.5% Treasury yield as a discount rate in our stock models and these models still say stocks are still undervalued. We do not believe the recent drop in stock prices is a long-term move and expect equities to move higher in the months ahead. (His record on predicting the market is better than ours , , ,)

The same holds true for the economy. The US economy has grown just fine with much higher real yields than exist today. The bottom-line is that fears over the Fed are misplaced and an over-reaction.

This is the new normal? Trillions of wealth lost never recovered? New growth line far below the old growth line? Approaching a majority of adults who won't participate in the workforce. Combined tax rates jumping past the 50% mark. Regulations worse than ever. Industries nationalized. Downgraded credit rating. Other countries looking for a new, world currency. We are unable to sell our own bonds. America's interests in foreign Policy ignored around the world. Wesbury is right. This IS the new normal.

Wesbury: "...fearing an end to QE is giving QE too much credit in the first place."

An injection rate of $85 BILLION A MONTH is not a serious drug habit? If it wasn't having an effect, why are they doing it?

"we don’t think QE actually works. Yes, the monetary base has jumped dramatically, but the M2 measure of money is still growing along its long-term 6% trend."

Money expansion HAS hit the money supply, apologies for the redundancy, but it has not hit velocity, because money shortage, since at least 2009, has had nothing to do with why this economy is stuck with its parking brake on.

"Everyone knew the Fed would say it, then slow it, then stop it,…and only then raise interest rates and unwind it. And each will only happen when the Fed thinks the economy can handle it."

In other words this Plowhorse-strength economy cannot stand on its own hoofed feet, according to the top decision makers today, with the market concurring.

I am stuck with my conclusion that the ability of big companies to continue to make big money in collusion with big government keeping out under-financed startups through over-regulation tells us shockingly little about where the US economy is heading.

If Republicans were in charge, people would be furious about these high profits of established companies thinning their workforces that he refers to.

I think there is a distinction here to be made between the actual economy and the market.

As far as real people living in the real world go, we are in complete agreement.

That said, I think Wesbury is looking more at the stock market and where it is headed.

"If it wasn't having an effect, why are they doing it?"

Because they are economic illiterates. Because of the power it gives them.

Concerning velocity, that certainly is a key point. However, if Wesbury and we are right that this is a plow horse/stagnant economy and if Wesbury and we are right that Keynesian stimulus does not work and if the Fed begins draining reserves, then maybe the result will be somewhere short of the apocalypse.

Your points are valid and well received. Wesbury and I both blur the distinction between the market and the economy. When he starts spinning that things other than 'the market' are doing fine economically, I like to get back up on my soapbox and offer the other side of it. Apocalypse or not, the under-performance of this economy, caused by unnecessarily harmful policies, is a human tragedy.

CHICAGO, June 20 (UPI) -- Results of a recent survey indicate many of the jobs lost in the last recession are not returning now or ever, a private U.S. employment firm said Thursday.

The survey conducted by outplacement firm Challenger, Gray & Christmas involved employers who had eliminated jobs during the recession. The intent was to find out how many jobs have already been recreated, how many are returning in the future and how many might be lost forever.

To start, 53 percent of the human resources executives who responded to the survey indicated that their firms had cut jobs during the December 2007 to June 2009 recession, the firm said.

That said, 82 percent of respondents indicated that they had hired new workers since January 2010.

Of those who have hired workers, 33 percent indicated some of the laid off workers had returned to work and 67 percent indicated that they have built up their workforce starting "from scratch," the outplacement firm said.

In addition, 43 percent of the human resources executives who have returned to hiring indicated their workforces had returned to or surpassed pre-recession levels and 15 percent indicated they intended to return to pre-recession levels in time.

But 43 percent indicated their peak number of workers was in the past. Those executives indicated their firms had no intention bringing their workforce back to pre-recession levels, Challenger, Gray & Christmas said.

Those human resource executives represent a lot of lost jobs. The recession officially ended in June 2009, but the shrinking of the national workforce continued for another seven months, eventually accounting for 8,736,000 lost jobs, National Bureau of Economic Affairs data indicates.

"What we have come to know as 'the jobless recovery' may be the new post-recession norm, as employers rebuild their workforces from scratch, take more time to vet candidates, and find ways to operate with fewer workers," said Chief Executive Officer John Challenger.

"To put that in perspective ... basically, every one of the 8,030,000 jobs created between August 2003 and January 2008 plus another 700,000 were wiped out," Challenger said.

Challenger, however, said jobs were being added to the economy at a faster pace than in the previous two recessions.

The problem is that the job losses were huge.

"It is just taking longer to rebuild due to the fact that we started in a much deeper hole," Challenger said.

Inflation in the United States is largely seen as a built in part of our economy. People take it for granted as if this was simply the order of things. Yet our central banking system has inflated our debt based financial system and subsequently, the value of money has eroded. For example, most items that are financed through debt have increased dramatically during a time when household income has reverted to inflation adjusted levels of the 1990s. The cost of inflation is hidden of course from the eyes of the public as to not shock people into action. Playing with interest rates, a car that once cost $20,000 is now going for $30,000 but the monthly payment has remained the same thanks to the Fed’s unrelenting push to lower interest rates. There is a cost to all of this of course. If it were so simple to fix an economy, the Fed would simply send unlimited debit cards to each and every American. Inflation is a threat to the economy from the perspective that it destroys the purchasing power of working and middle class Americans, those with limited access to debt. In our economy, debt provides access to real assets and those with the most access to debt (banks) can lock into the larger share of assets (i.e., banks now buying up thousands of rental properties). Is inflation a main culprit in the two income trap?

"Apocalypse or not, the under-performance of this economy, caused by unnecessarily harmful policies, is a human tragedy."

To this I would add the destruction of savings as a result of the war on savers, the millions who have lost jobs that will never come back, etc. I know you already know this, I merely take a moment to say it out loud.

The recession ended four years ago. But for many job seekers, it hasn't felt like much of a recovery.

Nearly 12 million Americans were unemployed in May, down from a peak of more than 15 million, but still more than four million higher than when the recession began in December 2007. Millions more have given up looking for work and no longer count as unemployed. The share of the population that is working or looking for work stands near a three-decade low.

The recession ended four years ago. But for many job seekers, it hasn't felt like much of a recovery. Economy reporter Phil Izzo joins MoneyBeat.

Yet the job market is recovering. The unemployment rate has fallen to 7.6% from a peak of 10%. Employers have created 5.1 million jobs since the end of the recession and 6.3 million jobs since the labor market bottomed out in early 2010. And for all the attention on monthly ups and downs, job growth has held to a fairly steady pace of about 175,000 jobs a month over the past two years.

The trouble is that the pace is still far too slow to fill quickly the huge hole created by the recession. Even if the rate of hiring doubled, it would take more than three years to get employment back to its prerecession level, after adjusting for population growth, according to estimates from the Brookings Institution's Hamilton Project.

Enlarge Imageimageimage

"At 175,000 jobs per month, we're years away," said Adam Looney, a Brookings economist. "It just sort of speaks to how far we fell during the recession and how slow we've been to recover."

Economists have offered a range of explanations for the slow pace of job growth: uncertainty about government policies, a shortage of workers with the skills companies need, and budget cuts that have reduced public-sector payrolls by more than 700,000 since the recession ended. But most economists say the main reason is simple: Economic growth has been far too slow to spur much job growth. Companies have stopped cutting jobs—layoffs have fallen below their prerecession level—but actual hiring has been much slower to rebound. Recent market turmoil, combined with signs of slowing growth in China and other emerging economies, could exacerbate that caution, leading executives to delay planned hires.Previously

Slow-Motion U.S. Recovery Searches for Second Gear (06/25/13)

Beneath the surface, there are signs the job market is splitting into two. Close to 25% of the short-term unemployed—those out of work for six months or less—find jobs each month, a figure that has shown steady improvement since the recession, though it remains below its long-term average of 30%.

The nation's 4.4 million long-term unemployed haven't seen similar gains. Only about 10% of them find jobs each month, a number that has hardly budged in the past two years. In a recent experiment, economist Rand Ghayad sent out mock résumés for about 600 job openings; those that showed six months or more of unemployment generated far lower response rates from employers, regardless of the other skills or experience.

Ken Gray has experienced that frustration firsthand. In January 2011, Mr. Gray's wife died after a battle with ovarian cancer; three months later, he was laid off from his job as an account manager at AT&T, T +1.65% where he had worked for more than 20 years. Still grieving from the loss of his wife, Mr. Gray says he was slow to turn his full attention to his job search. By the time he did, the Chicago resident was long-term unemployed, and he has struggled to get prospective employers even to respond to his applications.

"You just feel so discouraged," Mr. Gray said. "You ask yourself what's the sense in sending a résumé if you don't hear anything."

Now 59 years old, Mr. Gray has been living off his dwindling savings since his unemployment benefits expired last year. He says he remains determined to find work. But long-term job seekers are twice as likely to leave the labor market as to find jobs, and many experts worry that many of them will never return to work. That could create a class of permanently unemployed workers and leave lasting scars on the economy.

"Once people reach a point where they no longer consider themselves employable…it is very difficult to pull them back," said Joe Carbone, president of WorkPlace, a Connecticut workforce-development agency that has developed a program targeting the long-term unemployed. "We are losing thousands of people a day. This is like an epidemic."

"OK folks, for those of us who believe interest rates are going to start really climbing, what investments do we avoid and what do we do to protect ourselves? What does a hunker down strategy look like?"

For most, the question is what debt to get out of. How many dollars and how many people are still owing on adjustable mortgages and equity lines of credit? That effect equals a cut in pay and a cut in disposable income, offset by what that is happening positively? (strike 1)

"Some 12 million Americans still can't find work, real wages have fallen for five years, three-fourths of Americans now live paycheck to check, and the economy continues to plod along four years into a quasi-recovery. "

- Today's WSJ editorial on the Carbonated President. He will intentionally increase our energy costs in all ways that he can through the Executive Branch acting alone. "That effect equals a cut in pay and a cut in disposable income, offset by what that is happening positively?" - Same as the effect of higher interest costs on household debt. (strike 2)

Back to the blurred distinction between the market and the economy, there is quite a bit of news lately about trouble with investments in emerging markets where these multi-national companies have been going to grow their profits beyond what the struggling US economy can sustain. (strike 3)

The major measures of activity were mostly higher in June. The new orders index rose to 51.9 from 48.8 and the production index jumped to 53.4 from 48.6. The supplier deliveries index increased to 50.0 from 48.7. The one negative exception was the employment index which declined to 48.7 from 50.1.The prices paid index increased to 52.5 in June from 49.5 in May.

Implications: The ISM index, a measure of manufacturing sentiment around the country, rebounded from last month’s drop, beat consensus expectations, and moved back into territory signaling expansion in the factory sector. The overall index rose to 50.9. The best news in today’s report was the gain in the new orders index to 51.9, suggesting faster growth ahead. According to the Institute for Supply Management, an index level of 50.2, which was the average for the second quarter, is consistent with real GDP growth of 2.5% annually. We think other data signal a real GDP growth rate very close to that figure. The weakest part of today’s report was for employment; that index declined to 48.7, suggesting another decline in manufacturing payrolls in June. Oddly, this is the second month in a row where the national ISM moved in the opposite direction as the Chicago PMI. Usually these two measures move in the same direction. The gap may be due to a transition in which sectors are performing the best. For example, furniture manufactures reported the strongest growth in June while transportation equipment makers were among the slowest growers. Sales for autos are already close to where they should be based on fundamentals (the driving-age population and scrappage), and we had been anticipating a transition by consumers toward slower growth in auto sales and faster growth in other sectors. On the inflation front, the prices paid index increased to 52.5 in June from 49.5 in May. Given loose monetary policy, we expect these inflation readings to remain above 50. In other news this morning, construction increased 0.5% in May, almost exactly what the consensus expected. The gain in May was due rising state & local construction (particularly transportation hubs and water supply) as well as home building; commercial construction declined in May (particularly manufacturing plants and communications facilities). Overall, today’s data are certainly no justification for euphoria, but aren’t a reason to panic either. What we have here is more data consistent with the Plow Horse economy.

Don’t fall for propaganda from the Federal Reserve about tapering quantitative easing, says ShadowStats editor John Williams in this interview with The Gold Report. His corrected economic indicators show the U.S. is nowhere near a recovery and the Fed will have to increase rather than decrease bond buying to prop up the banks and push off inevitable dollar debasement. That could be very bad for savers, but good for gold.

The Gold Report: On Wednesday, the Federal Reserve hinted that it might begin tapering quantitative easing by the end of the year based on signs of an improving economy. Gold immediately dropped from $1,347 an ounce ($1,347/oz) to $1,277/oz, a 7% decline and the lowest price in more than two years. The Dow Jones Industrial Average and NASDAQ were also off more than 2%. You called this “jawboning” and said that due to stresses in the banking system the Fed would be obliged to continue bond buying. Why would the central bank threaten to cut off the flow if it didn’t plan to do it?

John Williams: All the hype over the Fed’s so-called tapering is absolute nonsense. Fed chairman Ben Bernanke said the Fed’s pulling back of quantitative easing was contingent on the economy recovering in line with the Fed’s relatively rosy projections. He also indicated, however, that if the economy worsened, he would expand quantitative easing. When you consider that the official Fed projections are grossly optimistic, the conclusion is that we will have more, not less, bond buying from the government.

The jawboning was a multifaceted attempt to placate the Fed’s critics, while soothing the stock and bond market jitters at the same time. The comments, however, hammered equities and bonds, as well as gold. The negative impact on gold likely would have been viewed as a positive result by the Fed.

The banking system nearly collapsed in 2008. The federal government and Federal Reserve took extraordinary measures to keep the financial system from imploding. Those actions prevented an immediate systemic collapse, but they did very little to resolve the underlying problems. I contend that we’re still in recession, with the economy deepening into a renewed downturn. At the same time, the banking system solvency problems continue. Little has changed in the last five years.

The purported nature of the quantitative easing is a fraud on the public. While Bernanke describes the extraordinary accommodation in terms of trying to stimulate the economy, lowering the unemployment rate and attaining sustainable economic growth in the context of mild inflation, those factors are secondary concerns for the Fed. The U.S. central bank’s primary function always has been to assure banking system solvency and liquidity. All the easing efforts have been aimed at the banking system. The flood of liquidity spiked the monetary base, but it has not flowed through to the money supply and ordinary people.

Simply put, the Fed is propping up the banking system. Bernanke is using the cover of a weak economy to do that because the concept is not politically popular, but it’s what the Fed has to do because the underlying system is just as broken today as it was in 2008.

TGR: Let’s go back to your statement that the economy is doing worse rather than better. Didn’t positive housing start statistics and consumer confidence numbers just come out? How do you know if the economy is getting better or worse?

JW: Housing starts are still down 60% from their peak. Based on the first two months of the second quarter, housing starts are on track for a quarter-to-quarter contraction, a rather substantial one. Industrial production also is on track for a quarterly contraction. These indicators easily could foreshadow a contraction in the current quarter’s gross domestic product (GDP). The underlying economic issues remain, as in 2008, with structural constraints on consumer liquidity and banking system stability. With those ongoing, fundamental weaknesses, there has been no basis whatsoever for the purported economic activity since 2009, or for a recovery pending in the near term.

The consumer directly drives more than 70% of GDP activity. Indirectly, the consumer impacts the balance of the economy. To have sustainable growth in consumption, there needs to be sustainable growth in liquidity, reflected in income and, ideally, supported by credit. Instead, household income is shrinking and traditional consumer credit is heavily constrained.

Headed by two former senior Census Bureau officials, SentierResearch.com publishes monthly estimates of median household income adjusted for the government’s headline CPI inflation number. Those numbers show that household income plunged toward the end of the official economic downturn. Officially, the recession went from the end of 2007 to the middle of 2009, but the reality is that household income kept plunging after the middle of 2009. It hasn’t recovered. Right now, it’s flat and bottom-bouncing at the low level of activity for the cycle.

If you look at those numbers on an annual basis, again adjusted for headline CPI inflation, median household income in 2011 (latest available) is lower than it was in the late 1960s and early 1970s. The consumer here is in severe trouble. You can’t have inflation-adjusted or real growth in consumption without real growth in income. Income drives consumption. That’s basic.

You can buy a little extra consumption through debt expansion. The consumer in the precrisis era tended to maintain his or her standard of living by borrowing from the future. Recognizing a developing liquidity squeeze, then-Fed Chairman Alan Greenspan encouraged the consumer to take on as much debt as possible. In the decade prior to the 2008 panic, the bulk of economic growth was fueled by debt growth, not income growth. For the consumer, the credit crisis dried up everything except federally issued student loans, and those don’t buy washing machines and houses.

If you don’t have income growth or credit availability, that takes a toll on consumer confidence. Usually consumer sentiment follows the tone of the popular press on the economy, and monthly movement in the different consumer measures can be quite volatile. Despite the happy hype of recent headline monthly gains in consumer confidence, the news doesn’t have much relevance to our being out of economic trouble. Consumer confidence plunged starting in 2006 and we’ve been bottom-bouncing ever since. Current levels are consistent with numbers seen during the depths of the worst recessions in the post-World War II era. We’re still at recession levels in consumer confidence; those measures have not shown the full recovery that has been reported in the GDP.

Official GDP reporting shows that the economy turned down right after the end of 2007, plunged through 2008 into the middle of 2009, and then started turning higher and has continued higher ever since. If you believe the GDP numbers, the economy fully recovered as of the fourth quarter of 2011, regaining its prerecession highs, and has continued to expand ever since. No other economic series confirms that pattern.

The big issue in the reporting of the GDP is with the inflation-adjustment process. The government in the last several decades has changed its inflation estimation methodologies to lower the reported rate of inflation. In the case of the CPI adjustments, it’s has been trying to cut budget deficits by using a lower inflation rate to calculate cost of living adjustments for Social Security. A number of the changes to CPI reporting also affected estimates of the GDP’s implicit price deflator, the inflation measure used to remove the effects of inflation from the GDP calculations.

If you correct for the understatement of GDP inflation, the accompanying overstatement of economic growth reverses, showing that the GDP started to turn down in 2006, plunged into 2009 and has been bottom-bouncing along with other indicators, including housing starts, median household income and consumer confidence measures, and along with reporting of other series corrected for inflation overstatement, particularly industrial production and real retail sales. Other real world business indicators, including corporate sales of consumer products, are showing the same pattern of plunge and bottom-bouncing, as opposed to plunge and recovery. The reality is that the economy is weak and it’s going to get weaker.

We haven’t seen a recovery and that is why the Fed won’t end quantitative easing. Any talk of tapering is pure propaganda to placate global markets on the U.S. dollar, trying to hit gold and maybe get a sense of how the markets would respond to an actual withdrawing of quantitative easing.

TGR: We saw the response loud and clear on Thursday.

JW: Yes, the stock market is like a drug addict and Bernanke’s been the drug dealer, pushing direct liquidity injections.

TGR: The market came back a little bit on Friday. Do you think the plunge was just a temporary knee-jerk reaction and things will be back to their upward trajectory in no time?

JW: The stock market is irrational. It’s heavily rigged with big players manipulating it, and with the President’s Working Group on Financial Markets taking actions to prevent “disorderly” conditions in the equity market, as well as other markets. I would tend to avoid the stock market. Gold took a big hit, too, but the underlying fundamentals remain extraordinarily strong for gold. This is not a situation where everything’s right again with the world and the Fed is going to pull back from debasing the dollar. If anything, the Fed is going to have to move further into dollar debasement. That is what Bernanke was saying. If the economy doesn’t recover we’ve got to expand the easing. He is propping up the banking system under the cover of propping up the economy. Nothing that he is doing is helping the economy.

TGR: You called the dollar “a proximal hyperinflation trigger” and said that “gold is the primary and long-range hedge against the upcoming debasement of the dollar irrespective of any near-term price gyrations.” Yet the dollar seems to be stronger than ever. What would trigger the dollar-selling panic that you have predicted by the end of the year?

JW: A visibly weaker economy could have a devastating impact on the dollar. It would force Bernanke to expand rather than contract quantitative easing. That would result in heavy selling pressure against the dollar and a spike gold prices.

At present, there are four major factors out of whack between market perceptions and the fundamental, underlying reality. These misperceptions will tend to shift toward reality, and a confluence of these factors would be devastating to the U.S. currency.

At the top of the list, at the moment, is Fed policy, which we’ve been discussing. My contention is that the Fed is locked into quantitative easing. It can’t escape it.

A close second are U.S. fiscal conditions and long-range sovereign insolvency risks. Fiscal issues should come to a head after Labor Day, when the government runs out of room with all its current bookkeeping finagling so as not to exceed the debt ceiling. Prospects for a meaningful resolution of the fiscal problems remain nil. In the summer of 2011, the market reaction to the government’s fiscal inaction was clear: Heavy dollar selling and gold buying came out of that.

The third factor, again, is the economy being a great deal weaker than consensus expectations, based on the indicators I outlined. As weakening business conditions become more evident in the popular economic releases, that should be a large negative for the dollar. Aside from increasing speculation as to increased Fed easing, it also would have a negative impact on the federal budget forecasts going forward. Economic growth of 4% projected for 2014 is not going to happen. The deficit will explode, and, again, that is very bad for the dollar.

Finally, developing scandals in Washington have the potential to hit the dollar hard. The press has started raising questions about a number of cover-ups. I was involved in the currency markets during the Watergate era. I can tell you that on a day-to-day basis, as the scandal began to unfold, whenever the news was bad for President Nixon, the dollar took a hit. Anything that questions the stability of the government is a big negative for the dollar.

All of these factors work in conjunction with each other. That is why I am predicting a massive decline in the dollar at some point this year, which will spike inflation, certainly spike gold prices and will lead us into the very high inflation environment that will provide the basis for actual hyperinflation in 2014. It’s not just current government actions. It’s series of circumstances that have evolved over decades into a developing crescendo of dollar debasement or inflation.

TGR: You recently wrote that we’re approaching the endgame based on volatility in equities, currencies and monetary precious metals of gold and silver. What will that endgame look like? And how will we know if we are in it?

JW: Primarily I would look at the U.S. dollar as an indicator, when very heavy, consistent, massive selling of the U.S. dollar and dollar-denominated assets begins. As the selling becomes heavier, pressure to remove the dollar from its current world currency reserve status should become unstoppable. I would take that as a sign that we are moving into the position that will set the stage for the hyperinflation.

TGR: Whatever happens in the economy, it sounds as if Bernanke’s days will be numbered. What could that mean for economic policy and Federal Reserve actions? And what advice do you have for whoever takes his place?

JW: I wouldn’t want to be the person who takes his place. Bernanke is a very smart and generally well-intentioned individual who’s in a situation that was not of his creation, but one that he has been trying, with great difficulty, to extricate the Fed from. The Fed doesn’t have any real options here. The best it can do is continue to buy time.

There’s nothing the Fed can do that will stimulate economic activity, except possibly to raise interest rates. Low interest rates are actually negative for economic activity at this point. They constrain loan growth. With higher interest rates, banks have the ability to make more of a profit margin on their lending. The greater the profit margin, the greater the ability to lend to perhaps less qualified borrowers, to take a little more credit risk, but with that also comes loan growth. That helps fuel economic activity. It might even cause the money supply to pick up. The biggest constraint on bank lending, though, remains the still-troubled nature of the banking industry.

Separately, low interest rates devastate the finances of those trying to live on a fixed income. It used to be you could go invest your money in a CD and make a positive return, after inflation, and your money was safe, at least within the insured limits of the banking system. That’s not the case anymore. Domestically, there is no safe investment where you can beat the rate of inflation. Government policies are driving savers into riskier investments, such as the highly unstable stock market.

TGR: So you think by default we will have a continuation of the current policies?

JW: Yes, effectively. The Federal Reserve board has run along with the program, moving in accord with the government to save the financial system. Back in 2008, it could have let the banking system fail. Understandably, though, the Fed and the federal government decided to save the system at all costs. That meant spending, creating, lending and guaranteeing whatever money was needed. Whatever had to be done they did. They prevented the system from collapsing, pushing the problems down the road. Now all those problems again are coming to a head. With many of the same risks in the system today, as in 2008, there is potential for another panic. The Fed has to keep easing here to maintain liquidity in the banking system. The U.S. central bank does not have a choice in the matter.

TGR: It sounds as if there isn’t a lot that Bernanke’s replacement could do. Would your only advice be don’t hold a lot of press conferences?

JW: That would be a big plus. If there’s bad news, basically the central banker has to lie. If he or she says, “The banks are going to collapse,” or “The economy is going to hell,” that will move the process along in a self-fulfilling negative cycle. Accordingly, central bankers often attempt to put false a positive spin on things. Having a Fed chairman hold press conferences is actually something relatively new. “Jawboning” was one tool Bernanke thought he could use to influence the economy and market behavior. That’s deliberate policy, but it has problems, as we saw on Wednesday. The tradition for Fed chairmen has been to keep remarks to the minimum, whenever possible.

TGR: Sounds like some very good advice. Thank you for your time.

JW: Thank you.

Walter J. “John” Williams has been a private consulting economist and a specialist in government economic reporting for more than 30 years. His economic consultancy is called Shadow Government Statistics (shadowstats.com). His early work in economic reporting led to front-page stories in The New York Times and Investor’s Business Daily. He received a bachelor’s degree in economics, cum laude, from Dartmouth College in 1971, and was awarded a master’s degree in business administration from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

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Feldstein argues that the Fed should start to taper off now the QE program, not because the economy is healthy, but because they aren't working and the 'risks' that policy brings are growing. Perhaps a monetary thread issue, but I quote him for the following spin-free, US economic data relevant to discussions here. If the economy is in a stall, what other than QE was driving the market up?-----------------

Over the past year, unemployment has declined to 7.6% from 8.2%. However, there has been no increase in the ratio of employment to population, no decline in the teenage unemployment rate, and virtually no increase in the real average weekly earnings of those who are employed. The decline in the number of people in the labor force in the past 12 months actually exceeded the decline in the number of unemployed.

These poor labor-market conditions are unlikely to improve in the coming months. ... [The growth rate was] less than 2% in 2012, 1.8% in the first quarter of 2013, and a likely 1.7% in the second quarter [just ended]..."

Might I add, if the economic growth rate nationwide is roughly zero during this boom in oil and natural gas (due to fracking) with the related containment on the cost of energy for businesses, manufacturing and consumers, please imagine what the health of the economy is if we put our only growth sector in handcuffs.

This question is not answered. Where do we draw the line. I noted in previous post that we could probably easily replace the entire US workforce including all blue collar and some white collar workers by simply opening up borders to any one willing for a bit less.

The result is wages keep being driven down. As it stands now 75% of the nation cannot afford even putting a dime away into savings. While we are all marketed to death by a consumer economy all day long.

This is why I think whoever has good answers (or believable) to this fundamental problem facing most Americans can easily win an election.

Yeah Rubio can try to curry favor with this Drudge reported bill he is going to propose making abortion illegal after 20 months. Obviously to try to win back some love from conservatives he just squandered. But to think this is going to win in 2016. At least some of the talking heads on radio are waking up. The politicians in DC are another story.

One of the problems with an administration as comprehensively awful as Barack Obama’s is that people can’t keep track of all the crises. His foreign policy has collapsed, the economy is on life support, unemployment and poverty are at record-breaking levels, scandals pile one upon another. And–oh yes, don’t forget–the country is $17 trillion in debt.

Mark Steyn refers to the U.S. as the brokest nation in history, and in purely quantitative terms–$17 trillion–the proposition is not debatable. But Cato’s Dan Mitchell takes the analysis a step further. This chart, from the Organization for Economic Cooperation and Development, suggests that the U.S. is in worse fiscal condition than any developed country other than Japan and New Zealand. Greece? We should be so lucky!

But Dan isn’t crazy about this measure of fiscal ineptitude:

I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States.

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states.

Well, some of those individuals have contributed more than others. But let’s not forget that no president has the power to spend a nickel: all appropriations come from Congress. In truth, a corrupt bargain has been struck between the political class and a majority of voters–fluctuating, often reluctant, occasionally remorseful, but always enough to send big spenders back to Washington. So far, there is no sign that the out-of-control locomotive that is the product of this corrupt bargain can be deflected until it has flown off the cliff. At which point, of course, it will be too late.

Private sector payrolls increased 202,000 in June (+262,000 including revisions to prior months), beating the consensus expected 175,000. The largest gains were for restaurants & bars (+52,000), retail (+37,000), and administrative (+36,000, including temps). Government payrolls declined 7,000.The unemployment rate remained at 7.6% (7.557% unrounded).Average weekly earnings – cash earnings, excluding benefits – were up 0.4% in June and are up 2.2% from a year ago.Implications: Very good report on improvement in the labor market, with job growth and wage growth both beating consensus expectations. Nonfarm payrolls increased 195,000 in June and were up 265,000 including revisions to prior months. Government payrolls are still shrinking, so all of the gains were in the private sector. The labor market once again forcefully rejected the theory that the sequester is hurting the economy. Since the sequester went into effect, nonfarm payrolls are up an average of 183,000 per month versus 132,000 for the same four months (March – June) a year ago. Although the unemployment rate stayed at 7.6%, the “unrounded” figure was 7.557% (so, very close to a 7.5% headline). Civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 160,000, while the labor force was up 177,000. Total hours worked were up 0.2% in June, revised up for May, and up 2.5% in the past year. In combination with a 2.2% gain in average hourly earnings in the past year, total cash earnings are up 4.7%. After adjusting for inflation, these earnings are still up 3%+ from a year ago. In other words, workers are generating more purchasing power, consistent with our view that consumer spending will accelerate over the next couple of years. Another positive detail in the report was that the share of voluntary job leavers among the unemployed hit 8.8%, the highest since 2008. A higher share of job leavers shows workers are getting more confident about future of the labor market. The negative details were that the household survey, which generates the civilian employment numbers, says all of June’s job gains were among those age 20-24 (particularly women) and for part-timers. It also showed that the job gains were concentrated among multiple job holders. Given the volatility in these data series, we would not put too much emphasis on one month’s worth of data. However, it’s consistent with the large payroll gains for retail as well as restaurants & bars and probably shows some firms who would be hiring full-timers are hiring part-timers to avoid Obamacare. The big financial market question is how the Federal Reserve reacts to today’s report. We think the numbers support the case that it will announce a tapering of its asset purchases in September. Obviously, the labor market is far from perfect. What’s holding us back is the huge increase in government, particularly transfer payments, over the past several years. Despite that, entrepreneurs and workers are gritting out a recovery and the Plow Horse economy keeps moving forward.

============================

Patriot Post:

Jobs Report for JuneOn the surface, there was some good news in June's jobs report, with 195,000 jobs created. But the headline unemployment rate remained at 7.6 percent, while the U-6 rate -- a more complete measure that includes those who have given up looking for work -- jumped significantly from 13.8 percent to 14.3 percent.Hot Air's Ed Morrissey put it in perspective: "Even if the jobs [numbers] weren't 'weak,' it's still a stagnation result. The American economy needs to add 150,000 jobs a month just to keep up with population growth. At this pace, it would over 22 months just to make up for the million people who joined the discouraged-worker ranks over just the past year. It would take more than seven months just to make up for the number of people who moved into the involuntary part-time ranks this month alone. We're still mired in the Great Stagnation, and will be until we start getting consistent job-creation reports at the 300K level."

I agree that Wesbury has degraded to the point where he needs to be posted with a contrary opinion or spin in order for what he presents to be informative. It is quite a miss in my view that he would write an update about improved employment when both U6 and full time jobs are down.

Is not U6 a better and broader measure? Patriot Post: "...while the U-6 rate -- a more complete measure that includes those who have given up looking for work -- jumped significantly from 13.8 percent to 14.3 percent"

Hours worked are 'up' 0.2%. We will return to our previous growth line at this pace - never.---------Investors Business Daily today: A Solid Jobs Report? No, This Is a Crisis

Employment: From the media to Wall Street, June's jobs report is being spun as a major positive, a sign the economy is getting back on track. Maybe the pundits should look at the actual numbers, which are abysmal.

To hear some of them, the 195,000 payroll jobs added for the month while the unemployment rate stayed at 7.6% were a big deal. One investment house called it a "very good report." Another termed it "solid."Advertisement

Really? Let's take a little closer look at the numbers.

The total number of payroll jobs in the economy, at 135.9 million, is still 1.6% below 5-1/2 years ago, when the recession began. We're not even back at scratch.

At June's pace of 195,000 new jobs a month, it will take 11 months to get back to where we were in 2007. If you factor in monthly growth of 120,000 in the labor force, that will barely make a dent in unemployment.

In short, this jobs recovery isn't solid. It's pathetic.

It's even worse when you consider all of the net addition to June jobs - repeat, all - were part time. Compared with the 360,000 part-time positions created, full-time employment shrank by 240,000.

Year to date, only 130,000 full-time jobs have been added to our economy. The rest of the jobs - 557,000 - have been part time.

And tucked deep into the jobs report was this little tidbit: The underemployment rate, which measures those working in a job for which they're overqualified, or working part-time when they really want full-time work, shot up from 13.8% to 14.3%.

This isn't a solid jobs report. It's a crisis.

A new report from McKinsey & Co. says 45% of college graduates today have jobs that don't require college degrees. A generation of young, educated workers - our future human capital - is being wasted on waiting tables and selling shoes.

And those are the young people who can get jobs. The unemployment rate for 18- to 29-year-olds stands at 16.1%, with 1.7 million having dropped out of the labor force entirely.

Why is this happening?

Certainly five years of "stimulus" by President Obama and quantitative easing by the Federal Reserve haven't helped. And thousands of pages of new regulations, higher taxes on entrepreneurs and a deep philosophical antipathy toward healthy free markets by this administration have made businesses wary of hiring.

The No. 1 culprit, though, is ObamaCare. The added costs this monstrous piece of legislation has imposed on employers of full-time workers encourages them to hire only part-timers, who get few benefits and no health care.

So don't count us among those singing the praises of the latest employment numbers. From this vantage point, they look like more of the same: mediocrity.

I post Wesbury with some regularity because IMHO he is a quality economist with a strong track record. Yes, yes, I know the examples of his screw ups that have been posted here, but anyone is in the game and actually making measurable predictions is going to miss sometimes. As our own record here amply shows, we need to consider additional points of view. Like Scott Grannis, Wesbury is a supply sider and the supply side school gets much right that others get wrong. IMHO his posts here force us to think, define our terms, and question our assumptions in a way that is healthy for us.

I agree with you 100% on the value of reading Wesbury in addition to the doom and gloom out there. I am pointing out the converse, Wesbury's optimism alone without the opposing doom and gloom would also leave one misinformed. He hinted only subtly at the trouble with Obamacare indicated in the numbers and gave no clear signal that full time and broader unemployment is actually worsening.

For much of the past four years, we have felt like psychologists who constantly must help hypochondriacs over their fear of one thing after another. There is no reason to remind everyone of “the list” – it’s been endless, but the stock market and the economy have moved consistently higher despite these fears.So now that most everyone sees a relatively stable recovery, there are two things that seem to strike fear into investors’ hearts – the tapering of the Fed’s bond buying program and Obamacare. We dealt with tapering a couple of weeks ago (see Back to Normal on June 24), so now let’s tackle Obamacare. The fear is that the new law is going to make it more expensive to hire, boost overall business costs, reduce profits, and grow government.The law has already raised taxes and, if left untouched, will do so again as some companies dump relatively low-wage workers onto the government-run exchanges where they can get generous taxpayer-financed subsidies for health insurance. The original bill underestimated this cost.Meanwhile, if the law is fully implemented under the current Administration, the government would make companies provide a very generous set of benefits in order to avoid fines, including more coverage of relatively minor everyday expenses that should not be covered by insurance at all.We believe this is the opposite direction in which healthcare reform should be headed. We would rather see less government interference in the healthcare marketplace, more direct consumer interaction and fewer third party payers. True insurance should be for catastrophic situations.Putting our disagreement aside, there is a huge difference between thinking Obamacare is a bad law and believing it will wreck the economy and tank the stock market.In fact, the law faces major obstacles and problems that threaten its very existence. Already, the Obama team concedes difficulty in implementing the law, deciding to postpone for a full year, until 2015, the fines it was going to impose on companies with 50+ full-time workers if they don’t offer enough insurance. Pretty amazing, eh? The law was clear about the starting date, but, oh well.The Administration says it was responding to business requests for more time, but it really looks and smells like they believe the plan is a bad idea. Even left-wing blogger Ezra Klein, says the delay should be permanent.Meanwhile, many small and medium-sized companies can maneuver to avoid the burdens of the law, by hiring more part-timers instead of full-timers to avoid hitting the 50 worker level.In addition, many states are rejecting the Medicaid expansion offered in the law, even though the federal government would pay for almost all of it. These rejections will reduce the cost to federal taxpayers and leave the states that have rejected the expansion more nimble when some future Congress uses expedited budget procedures to curtail or even repeal the Medicaid expansion.In the end, we think investors have already priced in the negative effects of Obamacare. Now, over the next few years, investors will have a chance to price in the positive effects of Obamacare being much tougher to implement, and more likely to be watered-down or eventually repealed.Free markets work, in part, because they aggregate the wisdom of crowds in ways socialist planners never can. We still have faith that our democratic process will use the wisdom of the next few years to substantially change the law enacted three years ago.===========================

"The economy lost 240,000 full-time workers last month, according to the more volatile household survey, while gaining 360,000 part-time workers. In other words, the entire increase in the household measure of employment was accounted for by persons working part-time for economic reasons. The underemployment rate surged to 14.3% from 13.8%. ... There are 28 million part-time workers in US vs. 25 million before the Great Recession. There are 116 million full-time workers in US vs. 122 million before the Great Recession. In other words, 19% of the (smaller) US workforce is part time vs. 17% before the Great Recession. Some context: Even at 195,000 jobs a month, the US would not, according to Brookings, return to pre-Great Recession employment levels until 2021. ... Oh, there are some positives. Private-sector jobs were up 202,000. Since the sequester took effect, total nonfarm jobs are up an average of 183,000 per month versus 132,000 for same four months a year ago. ... The labor force participation rate, while still low, has risen two months in a row. ... Fine. While the labor market may be improving enough for the Fed, for American workers the Long Recession continues." --columnist James Pethokoukis

Wesbury post combined with a James Pethokoukis clarification, nice balancing act!------------Previously in the thread, "Doug: I think there is a distinction here to be made between the actual economy and the market."

Doug: "Wesbury and I both blur the distinction between the market and the economy."-----------

Wesbury today: "stock market and the economy have moved consistently higher"

Doug (now): The stock market moved way up; the economy has not hit first gear. All job growth is immigrant. All job growth is part time. Taxes on capital are up as much as 60% federal and 30% state, and there are now over 170,000 pages of federal regulations. Hooray? No, good luck!

(CNSNews.com) – The number of Americans receiving subsidized food assistance from the federal government has risen to 101 million, representing roughly a third of the U.S. population.

The U.S. Department of Agriculture estimates that a total of 101,000,000 people currently participate in at least one of the 15 food programs offered by the agency, at a cost of $114 billion in fiscal year 2012.

That means the number of Americans receiving food assistance has surpassed the number of full-time private sector workers in the U.S.

According to the Bureau of Labor Statistics (BLS), there were 97,180,000 full-time private sector workers in 2012.

The population of the U.S. is 316.2 million people, meaning nearly a third of Americans receive food aid from the government.

Of the 101 million receiving food benefits, a record 47 million Americans participated in the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps. The USDA describes SNAP as the “largest program in the domestic hunger safety net.”

The USDA says the number of Americans on food stamps is a “historically high figure that has risen with the economic downturn.”

SNAP has a monthly average of 46.7 million participants, or 22.5 million households. Food stamps alone had a budget of $88.6 billion in FY 2012.

The USDA also offers nutrition assistance for pregnant women, school children and seniors.

The National School Lunch program provides 32 million students with low-cost or no-cost meals daily; 10.6 million participate in the School Breakfast Program; and 8.9 million receive benefits from the Woman, Infants and Children (WIC) program each month, the latter designed for low-income pregnant, breastfeeding, and postpartum women, as well as children younger than 5 years old.

In addition, 3.3 million children at day care centers receive snacks through the Child and Adult Care Food Program.

There’s also a Special Milk Program for schools and a Summer Food Service Program, through which 2.3 million children received aid in July 2011 during summer vacation.

At farmer’s markets, 864,000 seniors receive benefits to purchase food and 1.9 million women and children use coupons from the program.

A “potential for overlap” exists with the many food programs offered by the USDA, allowing participants to have more than their daily food needs subsidized completely by the federal government.

According to a July 3 audit by the Inspector General, the USDA’s Food Nutrition Service (FNS) “may be duplicating its efforts by providing participants total benefits in excess of 100 percent of daily nutritional needs when households and/or individuals participate in more than one FNS program simultaneously.”

Food assistance programs are designed to be a “safety net,” the IG said.

“With the growing rate of food insecurity among U.S. households and significant pressures on the Federal budget, it is important to understand how food assistance programs complement one another as a safety net, and how services from these 15 individual programs may be inefficient, due to overlap and duplication,” the audit said.

CNSNews.com is not funded by the government like NPR. CNSNews.com is not funded by the government like PBS.

Our firm was founded 40 years ago on the belief that all Americans should have the opportunity to invest in the stock market with the same advantages available to institutions and the big guys. But looking at our capital markets today, we should all be concerned. It's becoming increasingly difficult for individual investors to compete on a level playing field. The system seems rigged against them. And they are responding by walking away.

A Gallup survey conducted in April found that just 52% of Americans were invested in "an individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA." This is the broadest ownership of capital in the world, but it is down from a Gallup-survey high of 67% in June 2002. That's not good for individuals, and it's not good for the country.

Investors are the lifeblood of the economy. They provide the capital that spurs job creation, innovation and entrepreneurship. No one will benefit if individual investors stop participating in the markets. But that is what's happening at a troubling rate. Here are some reasons for that trend—and our recommendations for restoring balance:

• High-frequency traders are gaming the system. Using sophisticated algorithms, high-frequency traders can trade stocks in an instant. Some flood the market with orders, then cancel 90% or more once they've glimpsed the state of the market and gleaned an advantage. Almost all "co-locate" their computer servers as physically close as possible to those of the exchanges to cut down the travel time of information by microseconds and then trade on that tiny speed advantage.

Acknowledging this new, high-speed environment, last September the Securities and Exchange Commission levied a $5 million fine on the New York Stock Exchange—the first ever against a U.S. exchange by the regulator—for providing stock-price quotes and other data to certain firms just moments ahead of the public. As Robert Khuzami, then director of the SEC's Division of Enforcement, said at the time: "Improper early access to market data, even measured in milliseconds, can in today's markets be a real and substantial advantage that disproportionately disadvantages retail and long-term investors."

It was a watershed moment, but regulators need to do more to ensure that all professional traders are playing by the same rules as the rest of us. A penalty on excessive cancellations, rigorous enforcement of rules regarding information access, and a top-to-bottom study of the NYSE's 40-year-old Market Data System would be good places to start.

• Glitches and errors plague the markets. From the "flash crash" of 2010 to the glitch-riddled Facebook FB -0.50% IPO in 2012 to the market-wide shutdown when Hurricane Sandy hit New York, individuals are losing confidence in the integrity of the system. In April, a Twitter hoax claiming President Obama had been injured in an explosion at the White House sent the market spiraling downward in seconds, with computer-driven trades flooding the market the instant the false news hit the wires.

Markets have always been affected by misinformation, but the speed with which high-frequency traders react to false stories is alarming. In this age of technological innovation and rapid-fire information dissemination, investors need to be confident that markets can keep up.

Regulators have been slow to respond to the epidemic of market glitches large and small. Stronger steps—such as imposing "kill switches" to stop trading in a stock when a problem occurs—need to be taken to ensure that systems can detect and isolate a problem before it spreads across the market.

• Tax policies here and abroad discourage investors. In the U.S., tax rates on capital gains and dividends went up for some investors in 2013, compounding a new surtax on investment income for wealthier taxpayers that went into effect this year as part of the new health-care law. While we support the goal of increasing health-care coverage for all Americans, doing so on the backs of investors seems shortsighted.

Overseas, a financial transaction tax is under consideration in several European countries. It's another tax on investors. Thus far, the Obama administration, to its credit, has been steadfast in its opposition to such a tax in the United States. But some in Congress see a tax on investors as a potential boon to the Treasury. As lawmakers debate tax reform, they should encourage investing, which boosts savings, rewards the good ideas of entrepreneurs and stimulates the economy.

• The retirement savings system is under attack.Private savings for retirement has played a critical role in supplementing safety-net programs by helping millions of Americans prepare for their futures. But instead of being celebrated, the laws that better enable people to take care of themselves are facing criticism and calls for drastic change.

President Obama's recent budget would set an arbitrary cap on the total amount of retirement savings an individual can accumulate in tax-advantaged retirement accounts. Reducing contribution limits to employer-sponsored 401(k) plans and individual retirement accounts is openly discussed on Capitol Hill. Some are even calling for the entire system to be replaced with one run by the government.

The system we have is not perfect. But instead of hindering it or scrapping it altogether we should be enacting policies that make it easier for employers of all sizes to offer employees a savings plan, encouraging market-based innovation, and making a concerted national effort to educate America's workers on how to maximize retirement plans, particularly with low-cost investment choices.

If policy makers in Washington embrace these goals, individual investors will regain the confidence that someone is fighting for them. Confidence and participation in the markets will rise, and the economy and average individual investors will benefit.

Mr. Schwab is the founder and chairman of the Charles Schwab Corporation. Mr. Bettinger is the company's president and chief executive officer. SCHW -2.03%

Retail sales increased 0.4% in June, coming in below the consensus expected gain of 0.8%. Sales are up 5.7% versus a year ago. Sales excluding autos were unchanged in June, coming in short of consensus expectations. These sales were up 0.1% including revisions to prior months and up 4.5% in the past year.

The increase in sales in June was led by autos and non-store retailers (internet and mail-order). The largest declines were for building materials and restaurants & bars.Sales excluding autos, building materials, and gas rose 0.1% in June. These sales were up at a 2.6% annual rate in Q2 versus the Q1 average.

Implications: Whatever happened to all the analysts who thought the sequester or fiscal cliff deal was going to kill the consumer? Despite their predictions of doom and gloom, we got another plow horse report on retail sales today. Although sales came in short of consensus expectations, they were up 0.4% in June and are up 5.7% since last year. With consumer prices up about 1.6% since a year ago, “real” (inflation-adjusted) sales are up more than 4% in the past year. The details of the report are favorable for future months. The largest drag on sales in June was building materials, which fell 2.2%. Given the rebound in housing, these sales should bounce back in the next couple of months. “Core” sales, which exclude autos, building materials, and gas, rose 0.1% in June, the twelfth consecutive gain. There was nothing in today’s report to write home about, but it is growth and much better than many analysts were projecting at the beginning of the year. For the rest of 2013, we still expect two major themes to play out for the consumer: first, an acceleration in consumer spending growth versus the past couple of years despite higher taxes and the sequester; second, a transition away from growth in auto sales and toward other areas, like furniture, appliances, and building materials. Consumer spending should accelerate because of continued growth in jobs, hours, and wages. In addition, households have the lowest financial obligations ratio (debt service plus other recurring monthly payments) since the early 1980s. In other news this morning, the Empire State index, a measure of manufacturing activity in New York, rose to +9.5 in July from +7.8 in June. This suggests a pickup in growth in July. Given today’s data on sales and inventories, it now looks like real GDP grew at about a 1.5% annual rate in Q2, just about the average growth rate for the past year.

(Reuters) - Business inventories rose marginally in May as sales rebounded, adding to a raft of data that have pointed to a sharp slowdown in economic growth in the second quarter.

The Commerce Department said on Monday inventories edged up 0.1 percent after rising by a revised 0.2 percent in April.

Economists polled by Reuters had forecast inventories unchanged in May after a previously reported 0.3 percent gain.

Inventories are a key component of gross domestic product changes. Retail inventories, excluding autos - which go into the calculation of GDP - increased 0.3 percent after rising by the same margin in April.

Business are being cautious about restocking against the backdrop of lackluster domestic demand. The report suggested inventories will be less of a boost to GDP this quarter.

The business inventories report comes in the wake of data this month showing a sharp widening in the trade deficit, which prompted economists to slash their second-quarter GDP estimates.

Inventories added more than half a percentage point to first-quarter GDP growth, which advanced at a 1.8 percent annual rate. Estimates for growth in the April-June period currently range as low as a 0.5 percent pace.

Business sales increased 1.1 percent in May after being flat the prior month. At May's sales pace, it would take 1.29 months for businesses to clear shelves, down from 1.30 months in April.

U.S. producer prices rose more than expected in June, pointing to an apparent increase in inflationary pressures that could make the Federal Reserve more comfortable about reducing its monetary stimulus.

A Reuters survey of economists had forecast prices received by the nation's farms, factories and refineries rising 0.5 percent last month.

A jump in gasoline prices fueled much of the increase and could weigh on consumers by leaving them less money to spend on other things.

However, a gauge of underlying inflation pressures pointed to a little more vigor in the economy. So-called core producer prices, which strip out volatile energy and food costs, rose 0.2 percent last month, boosted by a 0.8 percent increase in the price of passenger cars. Economists had expected core prices to rise 0.1 percent.

The 12-month reading for core inflation at the wholesale level rose to 1.7 percent from 1.6 percent. That actually could be good news for the economy because rising core inflation could be a signal of firming demand from consumers.

That in turn could make policymakers at the Fed more confident about recent assertions that the economy was strengthening quickly enough for the U.S. central bank to begin reducing its bond-buying stimulus program by the end of the year.

Inflation has drifted to considerably low levels in recent months, and some Fed policymakers argue the bond-buying program should continue at full steam until inflation firms.

Sales at U.S. restaurants and bars took the largest one-month tumble since the recession, a possible source of concern for an industry that has been a jobs engine.

Adrian Fussell for the Wall Street Journal Food-service sales fell 1.2% in June, the largest decline since February 2008, the Commerce Department said Monday. Restaurant sales fell in May as well.

From a year earlier, sales in the category are up 3.1%, a slower pace than the 5.7% gain for overall U.S. retail spending.

Restaurants and bars account for only 11% of total retail sales. But spending at those locations is largely discretionary and could signal Americans’ confidence in the economy. Meals out can be skipped more easily than trips to the gasoline pump or grocery store.

A continued slowdown in spending on dining could be worrisome for the labor market, too. The restaurant and bar industry has driven a disproportionate share of employment growth over the past three months, accounting for more than a fourth of all new jobs. It now accounts for nearly 1 in 10 jobs in America.

Forecasting economic growth for the second quarter of the year is always precarious. The reason is that the initial report on the second quarter is when the government goes back and makes revisions to GDP for the past several years. This time around, it’s particularly iffy because the government – for the very first time – is going to start accounting in GDP for the value of R&D spending by companies.Putting these obstacles aside, we’ve been calling the economy a Plow Horse for the last couple of years and, at the end of the month, it looks like we’ll be getting yet another Plow Horse report for second quarter economic growth.The data we are confident about are consumer spending, business investment, and home building. Combined, these parts of real GDP appear to have grown at a 1.6% annual rate in Q2. The other components of real GDP – the ones we are less confident about – inventories, government purchases, and trade should, on net, pull the overall economic growth rate down slightly, to 1.5%.This a little bit slower than we had been expecting a couple of months ago, but we still anticipate an acceleration of growth later this year. So do private companies, which added 199,000 jobs per month to payrolls in Q2.Once again, the reason we have a Plow Horse economy, and not a Race Horse economy, is that the huge increase in the size and scope of the federal government over the past several years is weighing on entrepreneurs. Still, it hasn’t completely smothered innovation and risk-taking, and so we’re left with plodding economic growth that would be so much faster if not for the burden of government.Here’s our “add-em-up” calculation of real GDP growth in Q2, component by component.Consumption: Sales of cars and light trucks were up at a 2% annual rate in Q2, while “real” (inflation-adjusted) retail sales ex-autos were up at a 1.5% rate. Services make up about 2/3 of personal consumption and they grew at about a 1.1% rate. So far, it looks like real personal consumption of goods and services combined, grew at a 1.3% annual rate in Q2, contributing 0.9 points to the real GDP growth rate. (1.3 times the consumption share of GDP, which is 71%, equals 0.9)Business Investment: Business investment in equipment & software looks like it grew at a 2.7% annual rate in Q2 while commercial construction was down at a 3.4% pace. Combined, with equipment carrying a heavier weight than construction, they grew at a 1.2% pace, which should add 0.1 points to the real GDP growth rate. (1.2 times the business investment share of GDP, which is 10%, equals 0.1)Home Building: The housing rebound continued in Q2, led by new home construction, and looks like it grew at an 11% annual rate. This translates into 0.3 points for the real GDP growth rate. (11 times the home building share of GDP, which is 2.7%, equals 0.3)Government: Military spending shrank in Q2 (but less than in Q1) and state & local government construction projects appear to have picked up. On net, we estimate real government purchases grew at a 0.5% rate in Q2, which should add 0.1 percentage points to real GDP growth. (0.5 times the government purchase share of GDP, which is 19%, equals 0.1)Trade: At this point, the government has only reported trade data through May. On average, the “real” trade deficit in goods has grown substantially compared to the Q1 average. As a result, we’re forecasting the trade sector subtracted 0.9 points from the real GDP growth rate.Inventories: Inventory accumulation slowed substantially late last year, in part due to a drought in the farm sector. But inventory growth picked up in Q1 and we expect the rebound to continue in Q2, particularly when adjusted for what we think are (temporary) declining inventory prices for the quarter. As a result, we’re assuming inventories add a full 1 percentage point to the real GDP growth rate in Q2.Add-em-up and you get 1.5% real GDP growth for Q2. Once again, no economic boom, but no recession either. No one bets on a Plow Horse, but it does deserve respect.=========================

From the front page of today's WSJ:

By BEN CASSELMAN CONNECT

The long-anticipated acceleration in the U.S. economy has been put on hold once again.

With second-quarter earnings season in full swing, one thing is becoming apparent: earnings growth is weak and revenue growth is weaker, and that’s a reflection of an economy that is slowing down. Ben Casselman discusses on MoneyBeat. Photo: AP.

Disappointing economic and corporate-earnings reports in recent weeks have dashed hopes that the U.S. was at last entering a phase of solid, self-sustaining growth. Instead, while economists expect a modest second-half pickup in growth, few are predicting the kind of substantial rebound needed to quickly bring down unemployment, raise wages and insulate the U.S. from economic threats abroad.

There also are signs that consumers—whose spending has helped prop up the economy for much of the past year—are beginning to tighten their belts. Retail sales grew a paltry 0.4% in June, Commerce Department figures showed, and would have been even worse if higher gasoline prices hadn't forced drivers to spend more at the pump.

"This year is proving to be more challenging than we had originally planned," Howard Levine, chairman and chief executive of discount retailer Family Dollar Stores Inc., told investors earlier this month. "The consumer is just more challenged than we had anticipated."

Sales at restaurants—a key source of recent job growth, adding more than 150,000 positions over the past three months—tumbled last month, suggesting consumers could be pulling back on discretionary spending.

The unsteady economy, both in the U.S. and internationally, is affecting companies' bottom lines—results have been mixed as firms begin reporting second-quarter earnings. Industrial giant General Electric Co. GE +0.40% reported lower global revenues but higher profit and said sales in Europe had "stabilized." Appliance maker Whirlpool Corp. WHR +2.03% posted sharply higher profits, but earnings in the technology-sector have generally fallen short of expectations.

The Federal Reserve is watching the data closely as it decides when to begin winding down its $85 billion-a-month bond-buying program. Many Wall Street analysts expect that process to begin at the Fed's mid-September meeting. But in Senate testimony on Thursday, Fed Chairman Ben Bernanke said it was too early to make a decision and reiterated that the timeline will depend on how the economy performs in coming months, warning that the economy "remains vulnerable to unanticipated shocks."

Economists now believe the economy grew at an annualized rate of just 1.5% in the second quarter, according to The Wall Street Journal's latest survey of forecasters. The economists have become markedly more pessimistic since June, when they estimated a 1.9% pace for second-quarter growth, and several forecasters now believe the growth rate fell below 1% for the second time in the past three quarters.

Such false dawns have been a recurring theme in a recovery filled with rosy projections that last only until the next crisis or unforeseen roadblock appears. Some experts said the latest disappointments should come as little surprise: Exporters and manufacturers have been hit hard by weak overseas economies, consumers are still adjusting to tax increases that kicked in early this year, and government spending has fallen due to the "sequester" budget cuts.

"I don't see these numbers as being surprisingly lousy," said Tara Sinclair, a George Washington University economist. "I would rather say that the forecasts we saw earlier were overly optimistic."

Not all the news is so grim. The housing market continues to show signs of recovery despite a recent rise in mortgage rates and a slowdown in home building in June. Measures of consumer confidence have generally stayed high despite recent financial-market gyrations. And critically, the slowdown elsewhere in the economy hasn't yet led to a pullback in hiring, which has held steady at about 200,000 new jobs per month in the first six months of the year.

Economists aren't sure what explains the seeming disconnect between hiring and economic growth. One possibility: Employers held off on hiring amid last year's economic uncertainty and are now trying to catch up.

That is what happened at Fastenal Co. The Winona, Minn., seller of bolts, screws and other industrial and construction supplies was slow to hire last year, which left the company without enough salespeople, according to CEO Will Oberton. Now the company is making up for lost time, hoping to hire 100 to 150 people a month for the rest of the year.

"We got behind on hiring people, or actually we threw the brake on a little bit," Mr. Oberton said. "We need to add the people even if the economy is slow."

But the hiring doesn't suggest Fastenal sees evidence of an economic rebound. "We aren't seeing any signs, or even any anecdotal stuff," Mr. Oberton said. "It seems like we've been bouncing along for quite some time."

That kind of catch-up hiring can't continue indefinitely. At some point, either growth has to pick up or hiring will slow.

Economists do expect modestly faster growth in the second half of the year: at a 2.4% annual rate in the third quarter and 2.7% in the fourth, according to the Journal survey. But even if those projections hold up, that would suggest another year of anemic growth around 2%, not enough to bring down unemployment quickly.

And the projections may not hold: Ian Shepherdson, chief economist of the research firm Pantheon Macroeconomics, noted that the U.S. is expected to run up against its congressionally mandated borrowing limit sometime this fall. Another round of debt-ceiling brinkmanship, Mr. Shepherdson said, could lead small businesses in particular to pull back hiring.

"While I think the third quarter will be better than the second, I'm nervous about the fourth," Mr. Shepherdson said.

Others are more optimistic. Joseph LaVorgna, chief U.S. economist for Deutsche Bank in New York, pointed to several factors that suggest the economy is on firmer footing than it has been in years: stronger household balance sheets, a rebounding housing market and some early signs that state and local governments are hiring again after years of cuts.

But Mr. LaVorgna said that after years of false starts, he doesn't blame Americans for greeting such claims with skepticism. "There is still a leap of faith," he said. "It seems like we always have an excuse or a reason to explain why the economy's weak."

While most of the trading universe was preoccupied with other things the price of crude oil has been ripping higher in an almost straight line. KKM Financial CEO and founder Jeff Kilburg says Americans aren't going to be able to ignore the spike for long.

In early trading Friday WTI crude oil tacked on another dollar, topping $109 a barrel, and racing to break $110 for the first time in multiple years. A close here would mark the second straight week of multiple percentage point gains.

"We're seeing oil prices unfortunately rise and that's going to mean pain at the pump," Kilburg told Breakout from the floor of the CME. "On July 1st crude was trading $96, now we interject some Egyptian turmoil and people are really scared."

Traders are frightened not just because many of them missed the move but they've been shorting crude during the rally. As WTI rallies those same traders are taking off the short position by purchasing upside calls or get long in other ways, all of which adds fuel to the rally.

The fundamentals are in the bears' corner as Kilburg sees it. Demand is weakening, global headwinds are picking up, and the dollar is relatively stable regardless of Bernanke's apparent best efforts to weaken it. He believes the price could move as high as $110, but any stability in Egypt could send it right back to the $90s in a hurry.

Even a drop in crude oil prices might not be enough to save motorists from price increases at the pump. Gas prices are suddenly on the rise but in this case it's not entirely the fault of "evil speculators" or Big Oil. The problem instead stems from Washington DC's devotion to the failed alternative fuel that is Ethanol.

Research suggests the net impact of growing corn as a raw ingredient for a gasoline blend is wildly inefficient, but politicians are considering raising the mix anyway. As the blend of ethanol to gas moves from 10% to 15% over the next few years, prices for refiners will increase. Refiners will pass the expense on to consumers. They're businesses that are accountable to shareholders, while the politicians answer to lobbyists.

DC and refiners are fighting over who is most to blame for the rising cost of converting crude into gas but the fact remains the refining process is becoming more expensive and consumers are going to pay for some of it.

For traders short crude a price break can't come soon enough. For drivers filling their tanks there is a the distinct possibility that gas prices will go up because of crude oil, but won't come back down because of DC.

"The additional cost to produce ethanol which will be blended with gasoline will come back to consumers," warns Kilburg. "It will hit us."

As a former citizen of the Detroit area, I simply shake my head, as the city’s race-based politics and poor business environment caused me to flee to the Golden State over 20 years ago. Subsequently, the continued devastation caused by the entrenched Democratic oligarchy is such that it makes a Somali exile long for his home country:

However, as a Californian, I really have nothing to crow about. Several of our cities have filed for bankruptcy, for the same set of reasons plaguing Detroit. In fact, the population of the two larger cities combined (Stockton and San Bernardino) is 500,000 plus — so the scale is on-par with that of Motown’s money wreck.

I am following the developments closely. Interestingly, Stockton is putting a sales-tax measure on the ballot to a potential solution. Good luck with that!

Michigan Circuit Court Judge Rosemary Aquilina ordered Detroit’s bankruptcy filings be withdrawn because they violate state law guaranteeing that pensions must be paid to public employees. Additionally, the judge specifically cited President Obama’s corporate bailout during her remarks on the decision, further ordering that a copy of her declaratory judgment be sent to the White House.

John Sieler of CalWatchdog notes how the ruling and attitude may impact California:

If Obama intervened in Detroit, he would have to intervene across the country, setting a new precedent of the federal government bailing out cities. And if that happened, you would see dozens, maybe hundreds, of cities declaring bankruptcy as a way to get federal funds. Thousands of cities everywhere, even financially sound ones, would become even more fiscally reckless, especially on pensions, assuming that, no matter what happened, the feds would bail them out.

Such bailouts soon would amount to hundreds of billions of dollars, goosing the already immense federal debt of $16.7 trillion.

And even if the president wanted to blow billions on municipal bailouts, the U.S. House of Representatives now is controlled by Republicans who wouldn’t cooperate. As a start, they wouldn’t bail out a city that voted 98 percent Democratic in the last election. And Republicans also wouldn’t want to bail out workers whose unions continually attack Republicans, while manipulating the system to push public employee pay and benefits to unsustainable levels.

As to the GM bailout, the latest estimate was that its final cost to taxpayers will be $25 billion. Just letting the normal bankruptcy proceedings go forward would have saved that money, while still reorganizing the company, albeit on terms not as favorable to the UAW and Democratic political ambitions.

Gov. Snyder’s office is appealing Aquilina’s decision and no doubt will prevail in the state’s own circuit court, which understands federal precedence in bankruptcy cases. Even if it loses there, the bankruptcy court will decide the case.

For California, this new Detroit drama will confirm that federal bankruptcy courts can set aside state constitutional protections on pensions.

In contrast, lawyers for the city of San Bernardino just asked a bankruptcy judge to set aside the objections of two public employees’ pension funds and rule that the California city is eligible for Chapter 9 protection.

Let’s hope our federal government forces the states to address these cases with sensible bankruptcy plans, and not by printing “Obama Money” to solve a massive crisis decades in the making.

This addresses the matter of oil prices that we were discussing yesterday.

=========================

Ethanol mandates driving spike in gas pricesPublished by: Herman Cain

Consequences.Have you noticed that gas prices are soaring again? The media and the left will follow their usual formula of blaming greedy big oil or their other typical talking points, but David Lutz, head of ETF trading at Stifel, Nicolaus says it’s yet another case of a government mandate resulting in unanticipated consequences."As a result of the 2005 Clean Air Act, refiners need to blend a certain amount of ethanol into gasoline every year, and every year the amount they blend in goes higher and higher," Lutz told the investment reporting firm Breakout. It’s not that expensive to comply with the mandate when consumption of gas is high, but when it goes down, the cost of compliance soars. Lutz estimates that half the current price spike can be attributed directly to compliance with the ethanol mandate.What’s this? It’s another example of a government mandate presenting unintended consequences. When Obama took office, the average price of gas was $1.85 per gallon. It is now double that. We’ve talked before about the Obama Administration’s reluctance to approve drilling on federally owned lands, which would add to the supply in the market and drive down prices. Now it’s clear that it’s not only what we’re not doing – drilling everywhere we can – it’s also what the government is doing, mandating the ethanol content and adding costs to the production of fuel.It’s yet another case of a government mandate coming with unintended consequences, which should sound familiar to anyone who’s following the unfolding of ObamaCare. We’re already seeing higher insurance premiums, job losses and impacts on the availability of care, not to mention much higher implementation costs than we were told to expect.Why? Because markets react to government mandates, and players in the market make adjustments to mitigate harm to them. Every time the government imposes a mandate, it acts as though none of this will happen, then acts shocked when it does.It’s hard to get rid of ethanol mandates because Iowa benefits from them, and no presidential candidate wants to upset people in Iowa. But every time you purchase a tank of gas, you’re paying for them.

As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects.

A WSJ analysis of more than 700 economic predictions between 2009 and 2012 by Fed policymakers shows doves, particularly Janet Yellen, have been the most prescient, while inflation hawks lagged the pack. Jon Hilsenrath explains. Photo: AP.

"I expect the pace of the recovery will be frustratingly slow," she said in a San Francisco speech. A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry in a speech to Idaho bankers: High unemployment and the weak economy would tamp wages and prices.

Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable."

Ms. Yellen was proved right.

Predicting the direction of the U.S. economy with precision is impossible. But the Fed must forecast growth, inflation and unemployment to guide its decisions on interest rates. Central bank miscalculations—when the Fed pushed interest rates too low or too high—have historically turned problems into catastrophes, fueling the Great Depression, for example, and the wealth-eroding inflation of the 1970s.

The Wall Street Journal examined more than 700 predictions made between 2009 and 2012 in speeches and congressional testimony by 14 Fed policy makers—and scored the predictions on growth, jobs and inflation.

The most accurate forecasts overall came from Ms. Yellen, now the Fed's vice chair. She was joined in the high scores by other Fed "doves," policy makers who wanted aggressively easy money policies to confront a weak U.S. economy and low inflation. Collectively, they supported Fed Chairmen Ben Bernanke's strategy to pump money into the U.S. economy.

The least accurate forecasts came from central bank "hawks," those who feared Fed policies would trigger rising inflation.

Examining such predictions is more than a parlor game. Fed forecasts are important now because the central bank is near a turning point that will have a substantial impact on the U.S. economy.

Fed officials are considering whether to scale back an $85-billion-a-month bond-buying program this year, a move that could pull stock prices down and send interest rates higher.

If the Fed believes growth and hiring will pick up—and inflation will rise to a more normal 2%—the central bank will start to pull back on the purchases.More

But if forecasts are wrong—if the Fed overestimates the economy's strength and pulls back too soon, for example—then economic growth could falter, stalling an incipient housing recovery and fueling the jobless rate.

"We should be keeping track of these forecasts and having some accountability," said Mark Gertler, a New York University economist who reviewed the Journal analysis.

Of course, forecasting ability doesn't always translate into wise central bank leadership. Arthur Burns, who led the Fed during the high inflation of the 1970s, was known for his forecasting prowess.

But New York Fed President William Dudley said forecasting errors have had serious consequences. "We were consistently too optimistic about growth over the 2009-2012 period," he said in a May speech. "As a result, with the benefit of hindsight, we did not provide enough stimulus."

Richard Fisher, the Dallas Fed president and another high scorer, took a different view. He has said slow growth was evidence the Fed's easy money medicine wasn't working and the economy needed less of it.

Who Has the Clearest Crystal Ball?

The Fed issues a quarterly forecast based on the views of its 12 regional Fed bank presidents and seven Fed governors. Over the past four years, these forecasts included errors, mostly from overestimating the economy's strength. None of the Fed forecast reports indicate who said what.

To evaluate the performance of individual Fed officials, the Journal looked at texts of speeches and congressional testimony. Forward-looking comments about the economy were rated for accuracy.

The Journal gave a mark ranging from -1.0—far off the mark—to 1.0—nearly perfectly correct—for each comment and averaged the total. A final score of zero showed someone was wrong as often as correct.

The analysis was shared with the Fed policy makers. Five of the 19 policy makers weren't ranked because they hadn't been at the Fed long enough or hadn't spoken publicly enough about the economy.

Ms. Yellen and Mr. Dudley—both in Mr. Bernanke's inner circle—ranked first and second in the Journal analysis. Both predicted slow growth and low inflation over the past four years. Ms. Yellen had the highest overall score in the Journal's ranking, 0.52. Mr. Dudley scored 0.45.

The lowest scores were tallied by Mr. Plosser, -0.01; St. Louis Fed President James Bullard, 0.00; Richmond Fed President Jeffrey Lacker, 0.05, and Minneapolis Fed President Narayana Kocherlakota, 0.07.

Investors who closely follow every comment by Fed officials don't appear to distinguish policy makers by the accuracy of their economic forecasts.

Macroeconomic Advisers LLC, a research firm, determined Mr. Plosser, Mr. Bullard and Mr. Lacker consistently moved markets more than Ms. Yellen. Messrs. Plosser, Lacker and Bullard and Ms. Yellen declined to comment for this article.

Forecasts by Fed officials depend on their view of how the economy works. Ms. Yellen, for instance, places great weight on the role of economic slack—high unemployment or idle factories—in driving inflation. Lots of slack, she has argued, holds down inflation. On the other hand, prices are more likely to rise when there are few available workers and factories are operating near capacity in this view.

"With slack likely to persist for years, it seems likely that core inflation will move even lower," Ms. Yellen said in September 2009. Her views warrant scrutiny because she is a candidate to succeed Mr. Bernanke when his term ends in January.

Mr. Dudley did especially well forecasting growth. Some Fed officials believed the current recovery would behave like past recoveries and the economy would, for a while, grow faster than its long-term trend of 3.2%.[image]

But in May 2010, Mr. Dudley returned to his alma mater, New College of Florida, with a grim counter argument during a commencement address.

"The recovery is not likely to be as robust as we would like for several reasons," he said, pointing to the fragile banking system and the debt weighing down many households. He declined to comment for this article.

Other Fed officials, including Mr. Bernanke consistently predicted that faster growth was just around the corner.

"Although the pace of recovery has slowed in recent months and is likely to continue to be fairly modest in the near term, the preconditions for a pickup in growth next year remain in place," Mr. Bernanke said in October 2010, just before launching a bond-buying program. Growth slowed the following year.

Mr. Bernanke finished in the middle of the pack in the Journal's analysis, in part because he often relayed the consensus of Fed officials. He declined to comment for this article.

Luck also played a role in forecasts. In 2011, for instance, the economy looked like it was moving to faster growth when a tsunami struck Japan, disrupting the global economy.

The Fed's hawks had some of the worst forecasters. Mr. Plosser overestimated growth, while Mr. Bullard, Mr. Lacker and Mr. Kocherlakota warned of looming inflation. Their forecasts were wrong almost as often as they were correct.

While Ms. Yellen focused on the impact of slack on inflation, some hawks focused on money. The late Milton Friedman, the Nobel Prize-winning University of Chicago economist, said inflation was always and everywhere a byproduct of monetary policy: Prices only shoot higher when a central bank pumps too much money into the economy.

Hawks worried the Fed's decision to pump trillions of dollars into the U.S. financial system after the crisis would result in fast-rising prices. They sometimes couched their worries as risks, rather than predictions. In 2009, for instance, Mr. Bullard warned that the Fed's bond-buying programs had created a "medium-term inflation risk."

"The hawks have been issuing warnings, but there has been no sign of the things they've been warning against," said Martin Eichenbaum, an economist at Northwestern University and a Fed dove.

Mr. Kocherlakota of the Minneapolis Fed changed his hawkish views in 2012. "Inflation is not coming in as hot as I expected," he said in an interview last year. "You have to learn from the data." He declined to comment for this article.

Mr. Bullard changed his focus at times. In 2010, and again more recently, he signaled concern about inflation getting too low. A St. Louis Fed spokeswoman said the Journal analysis failed to account for the role Mr. Bullard's warnings played in formulating policies that helped to prevent inflation from getting too high or too low.

Some of the Fed's best forecasts came from noneconomists, including Fed governor Elizabeth Duke and Atlanta Fed President Dennis Lockhart—former bankers—and Mr. Fisher, a former investment manager. Some of the Fed's most brilliant Ph.D.s, including Mr. Kocherlakota, generated the most subpar scores.

Economists generally rely on economic models based on past behavior. These models are used heavily by the staff at the Federal Reserve Board in Washington and at regional Fed banks. But the recession and the current recovery were unlike most past cycles.

"The models have been wrong," Mr. Bullard, one of the Fed's many Ph.D. economists, said in an interview with the Journal in November.

James Hamilton, an economist at the University of California at San Diego who also reviewed the Journal's analysis, warned against betting that the doves' recent winning streak would continue.

"This was a period of subpar GDP growth and low inflation," he said. "Whether these same individuals would also prove to be better forecasters during a period of strong GDP growth and rising inflation is difficult to determine on the basis of the last four years."

One reason the hawks have been wrong about inflation is that the money the Fed has pumped into the financial system has tended to sit at banks without being lent to customers.

Economists say it is possible inflation can still catch fire if banks lend more aggressively and money starts circulating more widely.

If that happens, Mr. Eichenbaum said, the hawks would be proven right and "everybody else is going to look real bad."—Michael R. Crittenden contributed to this article.

Weeks with lots of data are always interesting; but this one will be more wild than most.

Wednesday is the initial report on Q2 GDP and we expect a pretty tepid growth rate of 1.2%, which is down slightly from last week when we thought 1.5%. But this quarter government statisticians will do benchmark GDP revisions. Data will change, in some cases all the way back to 1929. So, we wouldn’t be surprised by any number between 0% and 2.5%

Over the past few years of recovery, real economic growth has often lagged our expectations, in large part due to shortfalls in business investment and inventories. This quarter could be similar. But recent numbers signal a turnaround. In the past three months, orders for “core” capital goods (ex-defense, ex-aircraft) are up at a 17% annual rate. Hiring has also accelerated. We expect any weakness in Q2 to reverse in Q3 and Q4, with growth rising to 3%+ in the months ahead.

All this may be lost as reporting on Wednesday will probably focus on the revisions to GDP data. The biggest change is treating R&D spending as a form of investment, just like buying equipment. The theory is that it expands the stock of knowledge, which is then used to discover or develop new products. A similar change is being made for art that lasts more than a year, like movies, books, or hit TV shows. (One day, they’ll include homemaking, which counts when we hire someone, but not when we do it ourselves!). The net effect of these revisions will be to boost the level of GDP by about 3%.

So with the top-line level of real GDP revised up, get ready because some portion of those who don’t like the president will claim this is part of a conspiracy to make the economy look better than it actually is.

We’re certainly no fans of many recent policy actions, and we can debate these changes to GDP data, but suggest you tune out the conspiracy-mongers. The changes have been considered for many years and just as easily could have been made under a President Romney…except then it would be different people claiming conspiracy.The most important thing to know is that the revisions don’t actually change our current standard of living; they just use a different number to describe it. It’s like back when they changed the SAT so you could get a higher score even with the same number of wrong answers. You’re no smarter than you were before, you just have a higher score.

The data alone should make this a wild week in the markets; don’t let nutty theories make it any wilder.